More Evidence That Obama Tacked in the Wrong Direction at the End of 2010...

… and replaced a team where at least some key senior players knew what they were doing with one in which nobody in the inner circle did.

Duncan Black watches:

Eschaton: Horrors: You know what would be business-friendly? Getting us out of recession and increasing demand for their products.

Mr. Daley has reason to be mad. He thought he was returning to Washington after a decade’s absence to soothe business leaders and strike confidence-building deals with Republicans.

Maybe there really is some ritual involving Jamie Dimon, aromatherapy, tax cuts, and the ritual sacrifice of 100 impoverished virgins, that will make the confidence fairy appear.

Or, you know, not.

John Harwood:

In Washington, a Season of Political In-Fighting: The top Senate Democrat, Harry Reid of Nevada, considers the White House chief of staff, William M. Daley, to be ham-handed. Democratic leaders complain that Team Obama’s zeal for secrets creates more problems than it solves. For instance, Senate Democrats believe inadequate consultation led the White House to botch the unveiling of “pay-fors” for Mr. Obama’s jobs package. Instead of reducing oil industry tax breaks and deductions for affluent taxpayers, which produced Democratic defections, they wanted the White House to adopt the “millionaire’s surtax” that the Senate is now substituting….

Within Mr. Obama’s circle, recriminations include complaints that Mr. Daley and the White House political strategist David Plouffe invested too much faith for too long in their ability to strike a debt-ceiling “grand bargain” with the House speaker, John A. Boehner. Some Obama advisers look back at the springtime standoff over government spending as a missed opportunity to confront Republicans, risking a government shutdown then that might have averted debt-ceiling paralysis later.

Mr. Daley has reason to be mad. He thought he was returning to Washington after a decade’s absence to soothe business leaders and strike confidence-building deals with Republicans.

So does Mr. Obama, who does not hide his frustration over the turn toward full-throated combat he now considers unavoidable. Nor do his aides hide theirs, over news accounts that they believe don’t adequately fault Republicans.

[T]here’s a design flaw that causes our government to underreact to crises like the Great Recession. In fact, there are a number of such flaws, some of which, like basic checks of concentrated power, serve us well in normal times. But the flaw on which I focus below—the deep misunderstanding and irrational fear of budget deficits—is something that we can and should change…. When an equity (as opposed to a debt) bubble pops, markets move quickly to mark down the asset inflation born of speculation. A share of stock in some worthless fad that was worth $1,000 on Monday can be worth $1 by Friday. Debt bubbles don’t work that way. Debt-based assets don’t get “marked-to-market” in the same way as stocks. De-nile ain’t just a river, and banks who hold such assets can engage in “extend and pretend” in a way they can’t when an equity bubble pops. This is especially the case in a housing bubble….

Is the Federal Government Capable of Reacting As Needed?

In the current context, the answer to the above question is clearly no…. Here’s how Ezra puts it…

These crises have a sort of immune system. It is never possible for the political system to do enough to stop them at the outset, as it is never quite clear how bad they are. Even if it were, the system is ill-equipped to take action at that scale. The actors comfort themselves with the thought that if they need to do more, they can do it later. And, for now, the fact that this is the largest rescue package anyone has ever seen has to be worth something. Perversely, the very size of the package is part of its problem. With something extraordinary that is nevertheless not enough, the economy deteriorates, and the government sees its solutions discredited and its political standing weakened by the worsening economic storm. That keeps it from doing more….

[T]he fact that we failed to recognize the depth of the recession was not at the heart of the problem. Other trusted voices—Klein mentions Krugman and Stiglitz (I’d add Dean Baker and Larry Mishel)—were warning that things were going to be worse than our forecast, and we heard them…. Our mistake was failing to follow up on the initial success…. What kept us from doing more? In fact, we did do more, but again, not enough. We extended unemployment benefits, the first time homebuyers credit, the Hire Act, the payroll tax holiday, a small business lending bill, and more. Yet, we’re still stuck, and at this point even the tiniest policy lift is terribly heavy….

I do know that talking about green shoots didn’t help (I remember some critic at the time suggesting that we must be smoking green shoots). But I actually think the “green shoots” mistake is an important hint. One reason to go there is because if you believe things are truly getting better—if you really think that soon the private sector can pick up the growth baton—then you can pivot away from spending toward deficit reduction. And the internal desire to do that is always strong in the White House—at times like this, too strong…

I'm sorry, but no. Even if you think in 2009 that there will be a "V"-shaped recovery, you take steps in 2009 so that you can do the needed policy in 2010 if the "V"-shaped recovery does not materialized. You:

Make sure the chair of the Federal Reserve does not regard the avoidance of absolute deflation as a reason to sit on his hands.

Make sure the Fed chair is backed up by governors who understand the Federal Reserve's dual mandate.

Prepare to do quantitative easing via the Treasury by using TARP authority money as mezzanine financing.

Prepare to do infrastructure investment via the Treasury by using TARP authority money as mezzanine financing.

Prepare to intervene in the housing market on a very large scale by getting Fannie and Freddie in shape to do so.

Pass a budget resolution early in 2010 so that you can do expansionary policy via Reconciliation later on if you need to.

Those are six things you do in 2009 (and at the start of 2010) to prepare for an "L"-shaped recovery. Obama did zero of them.

Comments

More Evidence That Obama Tacked in the Wrong Direction at the End of 2010...

… and replaced a team where at least some key senior players knew what they were doing with one in which nobody in the inner circle did.

Duncan Black watches:

Eschaton: Horrors: You know what would be business-friendly? Getting us out of recession and increasing demand for their products.

Mr. Daley has reason to be mad. He thought he was returning to Washington after a decade’s absence to soothe business leaders and strike confidence-building deals with Republicans.

Maybe there really is some ritual involving Jamie Dimon, aromatherapy, tax cuts, and the ritual sacrifice of 100 impoverished virgins, that will make the confidence fairy appear.

Or, you know, not.

John Harwood:

In Washington, a Season of Political In-Fighting: The top Senate Democrat, Harry Reid of Nevada, considers the White House chief of staff, William M. Daley, to be ham-handed. Democratic leaders complain that Team Obama’s zeal for secrets creates more problems than it solves. For instance, Senate Democrats believe inadequate consultation led the White House to botch the unveiling of “pay-fors” for Mr. Obama’s jobs package. Instead of reducing oil industry tax breaks and deductions for affluent taxpayers, which produced Democratic defections, they wanted the White House to adopt the “millionaire’s surtax” that the Senate is now substituting….

Within Mr. Obama’s circle, recriminations include complaints that Mr. Daley and the White House political strategist David Plouffe invested too much faith for too long in their ability to strike a debt-ceiling “grand bargain” with the House speaker, John A. Boehner. Some Obama advisers look back at the springtime standoff over government spending as a missed opportunity to confront Republicans, risking a government shutdown then that might have averted debt-ceiling paralysis later.

Mr. Daley has reason to be mad. He thought he was returning to Washington after a decade’s absence to soothe business leaders and strike confidence-building deals with Republicans.

So does Mr. Obama, who does not hide his frustration over the turn toward full-throated combat he now considers unavoidable. Nor do his aides hide theirs, over news accounts that they believe don’t adequately fault Republicans.

[T]here’s a design flaw that causes our government to underreact to crises like the Great Recession. In fact, there are a number of such flaws, some of which, like basic checks of concentrated power, serve us well in normal times. But the flaw on which I focus below—the deep misunderstanding and irrational fear of budget deficits—is something that we can and should change…. When an equity (as opposed to a debt) bubble pops, markets move quickly to mark down the asset inflation born of speculation. A share of stock in some worthless fad that was worth $1,000 on Monday can be worth $1 by Friday. Debt bubbles don’t work that way. Debt-based assets don’t get “marked-to-market” in the same way as stocks. De-nile ain’t just a river, and banks who hold such assets can engage in “extend and pretend” in a way they can’t when an equity bubble pops. This is especially the case in a housing bubble….

Is the Federal Government Capable of Reacting As Needed?

In the current context, the answer to the above question is clearly no…. Here’s how Ezra puts it…

These crises have a sort of immune system. It is never possible for the political system to do enough to stop them at the outset, as it is never quite clear how bad they are. Even if it were, the system is ill-equipped to take action at that scale. The actors comfort themselves with the thought that if they need to do more, they can do it later. And, for now, the fact that this is the largest rescue package anyone has ever seen has to be worth something. Perversely, the very size of the package is part of its problem. With something extraordinary that is nevertheless not enough, the economy deteriorates, and the government sees its solutions discredited and its political standing weakened by the worsening economic storm. That keeps it from doing more….

[T]he fact that we failed to recognize the depth of the recession was not at the heart of the problem. Other trusted voices—Klein mentions Krugman and Stiglitz (I’d add Dean Baker and Larry Mishel)—were warning that things were going to be worse than our forecast, and we heard them…. Our mistake was failing to follow up on the initial success…. What kept us from doing more? In fact, we did do more, but again, not enough. We extended unemployment benefits, the first time homebuyers credit, the Hire Act, the payroll tax holiday, a small business lending bill, and more. Yet, we’re still stuck, and at this point even the tiniest policy lift is terribly heavy….

I do know that talking about green shoots didn’t help (I remember some critic at the time suggesting that we must be smoking green shoots). But I actually think the “green shoots” mistake is an important hint. One reason to go there is because if you believe things are truly getting better—if you really think that soon the private sector can pick up the growth baton—then you can pivot away from spending toward deficit reduction. And the internal desire to do that is always strong in the White House—at times like this, too strong…

I'm sorry, but no. Even if you think in 2009 that there will be a "V"-shaped recovery, you take steps in 2009 so that you can do the needed policy in 2010 if the "V"-shaped recovery does not materialized. You:

Make sure the chair of the Federal Reserve does not regard the avoidance of absolute deflation as a reason to sit on his hands.

Make sure the Fed chair is backed up by governors who understand the Federal Reserve's dual mandate.

Prepare to do quantitative easing via the Treasury by using TARP authority money as mezzanine financing.

Prepare to do infrastructure investment via the Treasury by using TARP authority money as mezzanine financing.

Prepare to intervene in the housing market on a very large scale by getting Fannie and Freddie in shape to do so.

Pass a budget resolution early in 2010 so that you can do expansionary policy via Reconciliation later on if you need to.

Those are six things you do in 2009 (and at the start of 2010) to prepare for an "L"-shaped recovery. Obama did zero of them.